What got in the way of a Pure-Bitcoin ETF?


With the rumor that regulators will soon be accepting a Bitcoin-backed exchange-traded fund (BTC), it’s important to understand the journey of some of the early crypto-based ETFs that were recently approved by government agencies.

The United States Securities and Exchange Commission has approved an ETF adjacent to Bitcoin, offering investors the opportunity to gain exposure to Bitcoin through the stock markets, and the most recent acceptance was that of the ProShares Bitcoin ETF Strategy, which began trading on NYSE Arca in October. 19.

It’s important to note that the aforementioned exchange-traded funds are not purely crypto ETFs and only track stocks of crypto-related companies or futures.

The SEC has yet to approve a pure crypto ETF, unlike in Canada in the spring when regulators approved three ether-based ETHs (ETHs) from three different companies: Purpose Investments, Evolve ETF and CI Global Asset Management.

Despite the good news from regulators starting to accept crypto ETFs, many questions remain as to why there have been so many challenges to list them. This fall, there has been a lot of anticipation and speculation about what exactly ETFs are and how they can boost – or hinder – the crypto market as a whole. Here are the issues, challenges, and possible future of cryptocurrency-backed exchange-traded funds.

Regulatory mismatch

Exchange-traded funds, in general, are investment funds that track a basket of assets in the stock market and can be traded in the same way as common stocks.

While there are ETFs for just about any asset, the problem with crypto is that there is still uncertainty among regulators about how to define Bitcoin and other cryptocurrencies, and how. way to protect consumers from exposure to risk. These issues could present a challenge as pure crypto ETFs begin to appear in the stock markets, as lack of regulatory clarity could lead to regulatory issues in various national bodies and around the world.

The various financial regulators in the United States, for example, all have different – sometimes conflicting – views on what cryptocurrencies are, especially when it comes to taxation and trading.

In 2020, France’s main financial regulator, the Autorité des Marchés Financiers (AMF), responded to the European Commission’s guidance on “crypto-assetsâ€, stating that it is still too early to define them explicitly. A spokesperson told Cointelegraph at the time:

“The AMF considers that giving a precise classification applied to crypto-assets could be premature at this stage. It is only after solid feedback that we will be able to judge the relevance of a precise classification (eg ‘utility tokens’, ‘security tokens’, ‘payment tokens’, ‘stablecoins’ etc.).

French fund manager Melanion recently approved its Bitcoin-adjacent ETF, with the hope that its shares will follow the price of Bitcoin, first in the French market and soon in many other European markets.

Cointelegraph reached out to Jad Comair, founder and chief information officer of Melanion, who mentioned that because it is not possible in the European market to directly expose investors to Bitcoin through the framework of collective investment funds in securities (UCITS) – which is “a format used by 99% of ETFs listed in Europe” – the company had to be smart and create “a unique index construction methodology that measures exposure to Business Bitcoin “.

This means that the ETF tracks the stocks of companies that invest in Bitcoin, mine Bitcoin, or are otherwise involved in the crypto market, but it does not contain Bitcoin itself. “The index selects the companies most exposed to Bitcoin and weighs them based on their historical (beta) correlation with Bitcoin’s performance,†Comair said.

Fears vs risks?

There could still be risks associated with highly volatile assets like cryptocurrencies, especially with a Bitcoin ETF backed by futures.

Bitcoin futures ETFs track a basket of futures contracts rather than Bitcoin itself. Since the Bitcoin futures price may differ from the spot price, it is possible that the ETF will not accurately track the price of Bitcoin, thus exposing the ETF holder to some risk.

The term “contango” refers to when the futures price is higher than the spot price, while “backward” is when the futures price is lower than the spot price.

Related: Crypto Breaks Wall Street’s ETF Barrier: A Turning Point Or A Stopper?

Additionally, this high volatility means that regulators could put in place increased investor protection, especially after seeing the jumps the crypto market has seen over the past six months. This brings up the question:

Could an Exchange Traded Fund Help Mitigate the Risks of Volatility?

With the new acceptance and implementation of crypto futures ETFs – the most recent model currently traded on the New York Stock Exchange – this could “open the doors for” real “money to intervene, because, for now , the existing Bitcoin products are eligible for small pockets of investment, and Bitcoin itself is very complicated to put into a regular wallet, â€Comair said. More serious exposure to the markets, even through companies investing in Bitcoin, could push the market towards explosion and / or stability.

It is possible that changes in the crypto market will lead to greater acceptance of ETFs as the stock market learns to interact with the crypto market – and vice versa. With ETFs following companies investing in crypto and the emergence of crypto ETFs based on futures, could this lead to more widespread adoption of crypto investing as a whole?


About Rodney Fletcher

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